DON’T USE A HUMAN TRAGEDY TO PUSH YOUR FAILING “JAPAN IS BANKRUPT” THESIS…
I am amazed (and disgusted) at the number of commentators, pundits and “economists” who have come out in recent days to explain to the world how this human tragedy will result in a Japanese fiscal crisis. The people pushing this story are are the same ones that have been telling us America is bankrupt for the last 10 years and would have gone bankrupt 100 times over by shorting the Yen and JGB’s over the last 20 years. These pundits have been confounded for decades yet they never seem to lose credibility and never stop to consider why their thesis isn’t panning out.
In essence, these pundits say Japan is on the brink of a bond market collapse that will result in the inability of the government to finance its debt which leads to a Greek scenario. Of course, what these people fail to recognize is that Japan is fundamentally different from Greece in that Greece is a currency user and Japan is a currency issuer. Whenever someone compares Japan or the USA to a Euro nation you should immediately dismiss them and stop reading their content – they clearly do not have even the most basic understanding of monetary systems.
This is not to imply that Japan’s spending policies have been the right approach over the last few decades. Japan’s policies over the years have been terribly misguided. Much like our own policies are currently misguided. In the late 80′s Japan experienced dual bubbles in real estate and equities on the back of a stellar period of growth. They had deregulated their banking system, allowed their economy to become financialized and to top it off their government decided it was wise to take advantage of this period of stellar economic growth by running a budget surplus to “get their financial house in order”. In essence, this was almost exactly what the United States did in the years running up to our own dual bubbles.
Like the budget surplus in the USA in 1999 the surplus in Japan exacerbated the private sector debt problem as the public sector surplus resulted in private sector deficit. This ultimately resulted in en epic bubble collapse. Their solution was less than precise. Rather than take the Swedish approach the Japanese decided to let their banks earn their way out of the crisis. This only prolonged the inevitable deleveraging. This was combined with insufficient budget deficits that would have allowed the private sector to deleverage more quickly. This debt deleveraging resulted in anemic economic growth and persistent deflation. What ensued was a series of start and stop recessions and recoveries that happened to overlap with a difficult period of economic growth in many other parts of the world. As we all know it hasn’t been a pretty picture.
If all of this sounds familiar it should. America is suffering the exact same thing as we speak. But this confounds the hyperinflationists and defaultistas. They just can’t understand why this spending isn’t resulting in inflation and/or bankruptcy in Japan. The problem is, these pundits are working under a defunct model. They are assuming that a nation with endless supply of currency can run out of money and become insolvent in the same way a household, business or Euro nation can. The truth is, Japan can never run out of Yen. They can cause a collapse in their currency in the form of hyperinflation by printing Yen far in excess of productive capacity, but that’s clearly not happening. Japan is still struggling to battle deflation….
But none of this stops the pundits from using this tragedy to try to push their political agenda. Facts aren’t necessary for these people. If they can grab your attention via simple analogies and scary rhetoric they don’t need facts – they have won the second that you allowed yourself to be scared into listening to them. But the facts don’t lie and the facts say Japan is neither close to bankruptcy nor close to hyperinflation. Let’s review some facts.
There is, arguably, no better measure of a nations solvency than CDS prices. If you review the recent change in Japanese CDS you’ll notice that they are remarkably low considering the size of their public debt. You’ll notice that Greece and Ireland are more than 6 times higher than Japan currently (via Bespoke):
What about their bond market? If you’ll recall the solvency crisis last year in Europe one of the defining characteristics of risk was surging yields. As I often say, there really are bond vigilantes in Europe. If there are vigilantes in Japan they sure are asleep on the job. Just look at Japan’s 10 year bond at 1.2%! It has actually declined in recent weeks. Investors clearly aren’t concerned about solvency. And rightfully so. There is no such thing as Japan running out of Yen.
(10 Year JGB Yield)
Make no mistake. Despite this horrible human tragedy Japan is a strong and stable nation. Their people are hard working, disciplined and remarkably innovative. Their economy is stable, dynamic and diverse. They are not bankrupt and they would welcome some inflation. The USA is in a very similar position. Thus far, we have walked a tightrope through this balance sheet recession without allowing the fear mongerers to scare us into austerity. As we can see in Ireland, Spain and Greece the austerity approach has been nothing short of disastrous.
Our approach has been far from perfect. We should have forced our banks to take more pain. The response should have been focused on Main Street and not Wall Street. The Fed’s powers and involvement in the markets should have been reduced rather than increased. But this doesn’t mean we need to convince ourselves that the entire recovery response has been a failure. In fact, a simple accounting identity shows that the government budget deficit is the only thing keeping us from sinking back in to recession. As I’ve said before:
“The deficit of the entire government (federal, state, and local) is always equal (by definition) to the current account deficit plus the private sector balance (excess of private saving over investment).”
“Since we are running a -3% current account deficit the government MUST spend to the tune of 3%+ of GDP if the private sector desires to save. And that’s exactly what is occurring. In fact, the 10% deficit is allowing the private sector to save quite a bit (roughly 7%). Make no mistake, the deficit spending of the last 2 years is what has generated recovery.”
Japan made the mistake of starting and stopping their stimulus at a time when the private sector was deleveraging. This only exacerbated their problems and ultimately resulted in a kick the can strategy. If there is one thing that we can learn from Japan it is that we are not going bankrupt and we are not suffering hyperinflation. And if we make the mistake of Japan, by stopping and starting the deficit spending during a balance sheet recession we will certainly slip back into the abyss. There’s a lesson to be learned from this human tragedy – don’t be scared into believing everything you read about our nation’s imminent bankruptcy. If we allow ourselves to be scared into believing we are insolvent we’ll soon find ourselves suffering our own human tragedy.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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235 Comments
Of course Japan isn’t bankrupt – they’re a trading nation.
The US, of course, is.
Oh, and stop with the emotional crap to peddle your dogma.
Are you betting on it Jo? Are you short USA CDS and USTs? Or do you just run your big mouth all the time? Like most people of your ilk – you’re all talk, no action, can’t prove half of your nonsensical arguments and prefer to make progress by scaring the living daylights out of everyone else so you can push your small govt propaganda. The problem with people like you is that you can’t understand economics because you fail to first get off your political soapbox.
great comment Cullen. Let me guess, this guy is probably long GLD
Dogma is a belief. Cullen is not describing a belief. He is describing facts. If you’re going to be an insensitive jerk you should at least try not to look stupid when doing it.
You bet some of us look at this thing differently.
If the private sector, which is people looking out for themselves with THEIR OWN MONEY, think it’s a good time to deleverage and pull back, then in many peoples opinions that is exactly what should take place.
But, we’ve got a handful of people in wash dc that tell us, no, we don’t care what you want, we are going to FORCE YOU to stay in debt and try to keep things “propped up” so there is no recession.
Isn’t it simply a matter of common sense that after a “bubble”, what is necessary is a deflation to bring asset prices back to a level where they would be economically viable.
Everyone agrees that there was a bubble, but the intellectuals among us don’t seem to want to let prices revert to economic viability, and reason might just possibly be “political”. “No recessions on my watch”.
It’s the people vs the gov’t and the gov’ts enablers, the way i see it.
After a bubble, common sense tells me that we need deflation.
Do you think it wise to sustain asset prices that have been termed by everyone as a “bubble”?
For a regular reader you don’t seem to even understand my position. How many times have I said that the losers must lose? How many times have I said that the govt should not prop up prices? How many times have I said that banks should go bust and homeowners should foreclose? I have never advocated bailouts. But that doesn’t mean the entire country should sink into a black hole just because a handful of people made stupid decisions….
I don’t understand how you put up with half of these people. I would have given up a log time ago. Let them have their balanced budget and depression. See how they feel in a few years when they don’t have jobs and can’t feed their families. They’ll change their tune and then it will be too late.
So how do you make sure the stimulus goes only to the winners?
Except for a few crumbles (e.g. UE benefits), the stimulus went / goes to the losers.
InvestorX
I can’t speak for Cullen but my opinion is that you dont bailout losers. The stimulus should have gone towards investments in America and not loser homeowners and bankers. But the bankers and homeowners are getting most of it.
agree losers should lose, but they didn’t the gov’t assured that the wealthy class of banksters took the lions share.
There is no comparison for the amount of money, bailout to the banks and select big business and stimulus to big business, to that targeted to homeowners.
I’ve been very consistent about this from day one. This was a household crisis. It was never a banking crisis, but Bernanke whipped out his monetarist toolbox and started hammering away. See my commentary from when the Paulson Plan was first coming out:
http://pragcap.com/is-bailout
***SS: my opinion is that you dont bailout losers. The stimulus should have gone towards investments in America and not loser homeowners and bankers. But the bankers and homeowners are getting most of it***
…and that’s the problem: the US bails out loosers; they use the funds to prop up assett prices; they pay less tax on unearned income out of the F.I.R.E sector then the average worker in the US; the buy the votes of the US Senate to keep pushing their agendas
…consequently, the US economy contiunues to suffer with no end in sight
…and nobody gets it what the suckers are doing; instead, everybody is scared shitless about the US deficit
Kind Regards
The stimulus (as opposed to TARP- big difference) went mostly to support state budgets as they faced large deficits. I don’t see how that was subsidizing losers. We have to be careful to distinguish between capital transfers and income replacement. It’s a critical distinction and one Cullen’s been at great pains to make.
Beyond that, though, I would say that too many in America are obsessed with making sure not even one person gains unethically. We can all respect the moral argument, but some would have the US cut its nose off to spite it’s face. Is it really the morally superior argument to wreck the country so that we can say no one undeserving prospered on our taxes?
Far wiser, I think, to accept that some losers will benefit as the price of doing the right thing for all of us as a whole.
Gaius, or Cullen,
“We have to be careful to distinguish between capital transfers and income replacement. It’s a critical distinction and one Cullen’s been at great pains to make.” Can you elaborate on this a bit. If there are links, great, if not, I’d appreciate some clarification.
huh…how does one compromise on moral hazard without falling down a slippery slope.
By passing along the cost to our children of bailing those who believe they are above the law under the false pretense that we are saving the current generation has no contribution to the advancement of our society.
What you do is bring the economy to full employment with broad-based tax cuts and similar broad, main st-enabling stimulus, and then let the chips fall where they may. If you’re a loser (bank, corporation, over-indebted household, etc.) in a full employment economy . .. .sorry, for the most part.
Cullen has been saying we need to deleverage. What is with people around here? Do you even read the articles or have you made your conclusions beforehand?
While i agree that you have to exercise prudence, especially with your own finances, I would challenge the fact that it is time to de-lever. As a matter of fact as someone who did not get into debt going into the last cycle, i feel it is not necessarily a bad time to do so. If you believe the currency debasement/inflation argument, why not leverage yourself a bit?
“The truth is, Japan can never run out of Yen. They can cause a collapse in their currency in the form of hyperinflation by printing Yen far in excess of productive capacity, but that’s clearly not happening.”
Should I take comfort from that last remark?
The US can also keep printing US dollars and “never run out of dollars”…we will then all live in a world where the last remaining vestiges of credibility in our financial system will have evaporated. Such a world most likely would not include fundamental respect for civil society…which is a lot more threatening than reference to the issue of mere bankruptcy as in your headline
Japan’s CPI was negative in January. So yes, you don’t need to worry about hyperinflation.
It is paramount to understand WHEN money is actually created.
Interesting how you left out the part “in excess of productive capacity”.
YOU made a CONSCIOUS decision to leave that part of the statement out.
Now go to a quiet place and reflect on why you would do that. Do you think that any one of us are not capable of seeing how transparent that makes your argument?
Sectoral balances equation is one of the simplest, yet illustrative economic truisms I’ve ever seen; actually the most illustrative….
And yet people reject it. Just look at the comments here. It’s a frigging accounting identity people! How hard is that to understand? Geez.
Haha agreed. But you must also realize that with “news” comming from talking heads pushing political agendas rather than facts it Is easy to understand the blinders effect. It will take a voluntary great depression before there comes a time when people may actually decide to understand reality as opposed to supporting political parties like they do football teams.
Morph366, you have no fundamental respect for the civil society yourself by advocating for the country not to utilize Its resources when they are available and ready to serve the hungry. Ready to create wealth and prosperity.
Yet another support for Keynesian policy… Does Japan actually have to fully collapse economically before these people stop trying to tell us that piling debt upon debt upon debt alongside with printing money on top of printed money next to printed money is good for a country’s long-term economic prosperity? In fact, the last EIGHT centuries of data prove otherwise…
The policy is only Keynesian to those who’ve neither read nor understood Keynes. The term “Keynesian” has lost all meaning in the hands of dullards and reactionaries.
Neither Keynes nor his acolytes understood how or why his prescription worked in depression and not in normal economic times. It took the experience of Japan for people to begin to understand. Many clearly still don’t or won’t.
Because austerity is working great in Ireland, Greece and Spain, right? Can you please move there for the next two years and report back to us at the end of your term? Let us know if you find a job. Let us know if you make more money. I am pretty sure you’ll find that it’s miserable to live in a time of austerity during a balance sheet recession.
@Kristjan
Presumably you include the printing of mountains of paper currency as an example of a country “utilizing its resources”
Well if the resources are just sitting around and watching cable TV or rusting away how do you proposes putting them to work?
Good article except for the reference to CDSs. The Japan CDS market is EXTREMELY SMALL compared with the bond market. Such a small market can be influenced by the mistaken beliefs of a small number of people. It should be ignored unless and until it becomes a real, active market.
Cullen (and readers), 2 questions: you often mention that “the response should have been focused on Main Street and not Wall Street”. Can you elaborate on that, especially what in your opinion was the best way to help Main street? Also you said many times that “banks should go bust”. I tend to agree but struggle to find answers when confronted to people then saying that it would have been even more painful, between the layoffs, lack of confidence, less credit facility with so many small firms surviving on that…etc Same remarks for the auto industry, could it have been worse without the bailouts?
Pls send web links if you treated these specific questions before. Thx.
Best way to help main street quickly and deal with balance sheet recession at the same time is a payroll tax holiday. Every worker gets a 7% raise up to first 105k. Every business gets a 7% cut in labor costs to the same 105k. If we’d done that early, and instead of a lot of other things, it would have helped immensely–even the financial system would have been better off as more debts would have been able to be serviced. MMT’ers have been calling for this (and other things) for about 2.5 years.
The Economic policies of President WG Harding would work now–
1. Private Sector Problems:
a) Banks became and still are insolvent due to their greed/stupidity/criminality.
b) Unemployment(the real problem). People lost their jobs, subsequently some of them their houses. The unemployed spent only on necessities reducing the total demand for goods and services.
c) Businesses cut back on production and work force.
2. Government Problems:
a) Local governments faced budget crisis due to reduced income from taxes.
b) The federal government had to spend more on states, unemployed, stimulus etc.
To solve all above all you have to do is … employ everyone willing and able to work. There are millions of construction workers, engineers, etc that can rebuild the country for a fraction of the price that the private sector demands. It is much better to pay someone salary than pay him unemployment.
In a year or 2 the private sector will take over and the full employment program can be wind down.
Dimm–
Look to the Economic policies of Harding and the Depression of 1920/1921
Hardings solution:
REDUCED TAXES–JOB ONE!
REDUCED GOVRNMENT SPENDING
REDUCED GOVRNMENT REGULATION ON BUSINESS
LESS GOVRNMENT IN BUSINESS
GOVRNMENT & BUSINESS CO-OPS FOR EMPLOYMEMT–Even though this was a small program (at that time) it is what is needed NOW to cure Unemployment.
An example today ( NOT PERFECT ) of this would be the Medicare Co-Op Program? let me explain:
The Govrnment contracts with Insurance companies to provide Medicare services to Seniors—MediCare Advantage plans
Simply:
Seniors get there coverage from an Insurance Co rather than from the Govrnment.–The Govrnment pays a fee to the Insurance Co. per individual senior.
The Insurance Co. is more efficient than the Govrnment and makes money on this program. Ins.Co makes money by = The Fee + the efficiency
Consequently:
This Business/Govrnment partnership works because it provides lower cost and better service without the “Heavy Hand” of the Govrnment.
New Public Works projects with Business/Govrnment parnerships wouldmean new jobs.
“Fairness” must prevail — ALL States must benefit on equal basis.
“The Insurance Co. is more efficient than the Government”
yeah right … The same way banks were more efficient in giving student loans with government money. Heads I win, tail the government(all) lose.
Why do you think the government is not efficient? What is this nonsense based on, excluding non empirical populism?
For your first question – this could have been a golden opportunity to cut taxes massively. Instead, we propped up the banks and implemented a spending package that was poorly targeted.
I was in favor of an RTC response. That would have forced the banks to take losses, kick out the old management, screw the shareholders, screw the bondholders, cram down the debt and absolutely don’t encourage mergers between too big to fail firms. Then we could have implemented a plan of regulation that put these guys in check. Would it have been marginally worse? I don’t know. Maybe. But in the long-term it would have been a much more productive response.
“….forced the banks to take losses, kick out the old management, screw the shareholders, screw the bondholders,….”
*********************************************************
And so, did you ever witness any of our so-called financial “experts, pundits, or reporters” questioning the mind-numbing hypocrisy of Obama, Geithner, Summers, Paulsen, Rubin, et al?
Your remedy, Cullen, is exactly what WE, the IMF, and/or World bank, DEMAND of troubled, recipient countries before any bail-out funds are even considered.
But, when WE’RE the troubled country, it’s “save the filthy, criminal slugs first; women, children, and everyone else (Main St.) go to the end of the line.
As a foreign-born survivor of the Stalingrad Siege, and one who risked & gave up everything to come to America, I can assure you that we would have been just fine if we had implimented your suggested approach. Ordinery people can do extraordinary things, even against overwhelming odds IF they feel the cause is just, and IF the sacrifices are shared equally.
What happened in the debacle of ’07-’08 wasn’t an economic problem, it was, and I don’t use the term loosely, “Treason,” a financial coup-de-tat.
The President won’t help us, neither will Congress; nor the Supreme Court, the regulators, the media, nor the bureaucrats. It’s people like you, providing guidance, education, and a forum for the many regular, ordinary schlubs like us that will eventually be what leads us out of this morass.
I apologize for this soap-box rant, Cullen, but I don’t post very often. (Though I read this site daily) it’s just that I tend to flip-out (I’ve heard we Russians have been accused of having an unruly disposition sometimes) when someone like you invites us into their “home,” extends such uncommon courtesy, experience, and knowledge, and all for the simple goal of providing some rational way to traverse the treachorous journey ahead. And then some adolescent jerk. rich in testoterone, destitute in intellect, feels it’s just too cool to insult, demean, or otherwise show their mouth-breathing upbringing.
You’re doing a wonderful thing here Cullen. Often times I disagree, or question, your analysis or explanation about certain subjects. But I know, and it’s to your great credit, that you wouldn’t have it any other way.
Thanks for everything…….and das vidanya
Shooter, that’s a very kind comment. Thanks.
NYShooter, thank you for providing your comments and you are spot on about Cullen.
When Americans have overcome the pacification that results from being told how lucky they are to live in America and return to fighting tyranny within, then Americans will populate the streets in mass demanding change and as it happened on May 4th, 1970 at Kent State, demonstrators will be shot.
While I have often (and legitimitely) claimed my economical ignorance, I do claim to have some fundamental understanding of how people think. Let me state that I understand this blog’s position on our economy.
However, at some point people will stop and try to understand things – some sooner than others. A large segment of our society won’t accept our monetary policy once they understand it (i.e. it’s not based on anything concrete). Add to that the necessity of ALWAYS needing some kind of inflation in order for deficit spending work, and a dangerous scenario of lack of faith in our monetary system unfolds.
You have acknowledged that a lack of faith in the dollar would kill the dollar (as well as our country). This is what concerns me.
The only way to prevent this from happening is to keep the vast majority of the population in ignorance. Could this be the ACTUAL irrational market?
I wonder about this myself. If the entire populace were taught how the monetary system actually worked, would they accept it calmly or rebel even harder against it?
This may be (is) a massively gross overgeneralization, but for various reasons I’d wager the Democratic types would accept it more readily, Republicans less so. (And I’m not a Democrat, just for the record.)
Perhaps true. But Mosler was getting a good deal of traction from Tea Partiers running on tax cuts and never mentioning spending cuts–though if tax cuts are big enough, you can cut spending, too.
Also, consider this, perhaps:
http://neweconomicperspectives.blogspot.com/2010/07/towards-libertarianaustrian-modern.html
That link of Wray’s pretty much sums it up (tongue-and-cheekily). I think what Wray misses, however, is that libertarians hate govt involvement, period (standard theoretical libertarianism). Wray doesn’t seem to understand the philosophy of libertarianism. For example, if education, policing, fire fighting, and mail delivery could be privatized, they would prefer this form of servicing. It’s more than just “small govt”. It’s practically no govt at all. Other than the military and a few other critical functions (port security, etc), libertarians believe almost all govt is waste and would be better run by private agents. So even if govt only guaranteed the money to a private contractor, this would still be more govt involvement than ideal. In fact, libertarians would ultimately prefer no govt involvement in the creating of money, either – keeping this process in private hands, as well. This is a central libertarian tenet. The fact that govt controls the production of money is already past what most libertarians feel is an acceptable function of govt, let alone govt programs to help the unemployed or the poor, regardless of how it’s done. Which is why I doubt, if libertarians knew how our modern monetary system actually worked, most would feel any more positively towards it. I suspect they’d hate it even more. At least “foreigners funding our public debt” has private agents involved.
Mosler may have some Tea Partiers on his side, while “glossing over” a few of the details, but if they don’t understand how the system really works, it remains “pandering” to “useful idiots”, no? Just saying …
Actually, there are several libertarians among MMT supporters. No Austrians, though, I’m sure. And Randy understands their philosophy very well–he called them “wingnuts,” after all.
The problem is it can’t work in its purest form–it’s full of contradictions and Randy’s pointing a few of them out while also helping them understand that their general goal of a limited govt is perfectly consistent with MMT.
Also, many republicans support MMT. A quick look at Warren’s commentators will reveal that. And Winterspeak, an MMT’er with his own blog, is clearly a conservative. In the past, Warren would co-author pieces in the National Review. Historically, I’ve found MMT to be just as easy a sell to republicans and democrats (frequently democrats are a much harder sell, in fact, particularly after the Clinton years), though the current environment is a lot more politically charged and so it does get a bit more difficult for sure.
Once people realize that spending and tax cuts have the same effect on the budget they begin to reconsider their position….from there it all comes down to a debate about efficiency and targeting of spending….
Exactly.
I too sympathize with the libertarian perspective, at least theoretically. But as the expression goes, “In theory there’s no difference between theory and practice, in practice, there is.” Alas, I don’t think the ideal works quite so well in the real world. You’d actually have to turn away those who didn’t opt in to a medical plan, even if it meant they died in the street. Didn’t pay for private fire service? Enjoy watching your house burn down. I could handle it, but I know most couldn’t.
Scott -
Interesting about having libertarians and Republicans in the MMT camp. I’m not as surprised about the Republicans; after all, Cullen seems effectively one, and Mosler doesn’t seem to be a card carrying communist to me, either. Still, I imagine it’s a small percentage, overall. Partially due to so few people even being aware of what MMT is, and then whether or not these people accepted it or not after finding out about it. Perhaps if those who do can talk to their friends about it, over time the information will spread, which I suppose is what this forum, and Cullen and your posts, is/are doing. Then we can start talking about what Cullen brought up, what I would call the “real” issue at hand, the efficiency of spending. That’s a more important debate to me, given circumstances.
See my reply above.
It does no good to have fire insurance with a private fire dept. contract because your neighbor may not have the fire dept. contract and when he has an unattended fire it can spread to your house. Same with medical care, if private care can’t require your neighbors sanitation you may catch your neighbors disease despite your care.
Yeah, but wasn’t that the Democratic tea party? At least that’s what I saw in the YouTube videos.
It was the tea party, but he was running as a tea party democrat at the time. later he switched to independent.
in a way, we are seeing a replay of the Free Silver movement of the late 19th century. Money as a means of circulation vs. money as a store of value. if it doesn’t circulate then it has little value except to creditors.
If it is the small government tea party types that are pushing cuts to deficit spending, then we need to add Tim Geithner to that group.
Geithner says imperative to cut deficits
http://www.reuters.com/article/2011/03/16/us-usa-treasury-geithner-idUSTRE72F7M920110316
Excellent post Mr. Roche. Plenty of space on the more hysterical blogs for the fear-mongering and rubbish. TPC is at its best when its a forum for those wanting to get at the facts free of histrionics and bias.
Cullen,
CDS is not good indicator of a sovereign solvency. Simple example – A country X prints money to repay its debt, gets hyperinflation, destroys its currency, and yet CDSs expire worthless….
On more general issue…. Bankruptcy, schmankruptcy…. Let’s put it in different terms. Now a basket of Japanese government obligations (both set maturity – bonds, and no set maturity – currency) can buy a certain basket of goods/services/assets (both domestic and imported) – lets call it basket Z. I claim that in the future the same government obligations basket will be able to buy only small fraction of the basket Z.
I do not have any trading bets on it yet, waiting for catalysts. Talking about short-term developments, I think that yen will be a good short, once the yen carry trade is unwinded and full damage from the earthquake is realized.
Cullen, good post.
I happen to agree with you.
It’s quite amazing how quickly sentiment can change from long to short.
There are many with an agenda in the investing game.
Appreciate your unvarnished opinion.
Obviously some will not like it, but that’s not your concern.
Good stuff!
Sounds like Canada will be in a lot of trouble in 2-3 years if Japan/US are any guide!
Japan/US are a guide to Canada in that all 3 countries are the monopoly suppliers of their own currencies.
Where they are not a guide is in that Canada’s deficit is at a 20 year high and no one is even reacting, never mind overreacting.
Perhaps this is a consequence of better education. People know that the higher the deficit, the more money is in the private sector, eh?
Canada as had a surplus for at least 10 years the deficit is recent and it is the Household Debt in Canada that is presently reaching a new high. The vertical elastic is about to break. It’s not rocket science Canada as the second largest oil producing reserve and more money comes in then goes out.
Its Real Estate that may very well be a time bomb in Canada.
The strong CAD dollar (parity with USD) has hurt exports. The recent government deficits are large, but they’re actually helping to improve household balance sheets. The problem is not so much the balances of the household sector, foreign sector or government sector. Unusually high levels of corporate savings seem to be a major cause of the recent imbalances between sectors. I recently applied the sectoral balance approach to Canada here: http://fictionalbarking.blogspot.com/2011/03/economys-flow-of-funds-is-closed-system.html
Nicely done!
@morph366
if a bank is lending you money then new money is created right? If a lot of people a borrowing then money supply grows and demand grows and economy grows. That’s what we all want right? If you are over leveraged you are not going to borrow right? nobody else is going to borrow either, they are in debt they are trying to save they don’t want to spend. That means lower incomes. Now the government can step in and spend yet you are screaming hyperinflation.
“The truth is, Japan can never run out of Yen. They can cause a collapse in their currency in the form of hyperinflation by printing Yen far in excess of productive capacity, but that’s clearly not happening. Japan is still struggling to battle deflation….”
Cullen, deflation in Japan will not stay forever. Maybe we just have not reached the tipping point. Warnings concerning the US real estate bubble arised in 2004, but marktes chose the way of maximum pain and the bubble inflated until 2008.
I wrote this comment in which I also quoted from your article:
http://www.kaufkraftschutz.de/japan-vor-schuldenkrise/104 (german)
Best wishes,
MF
If Japan can never default then why is there a market for Japaneese CDS?
A) Japan can’t default for fiscal reasons but they certainly could default for political reasons (theoretcically). B) The existance of a market for CDS does not imply that those trading in the instruments actually understand anything.
MikeJ, see my comment above. There is no real Japan CDS market.
CDS markets are always smaller then the respective bond market. I’m not sure your argument is relevant. If there is no chance of default, then why is there a market at all?
Good question! For a smart arbitrageur shorting USA CDS is like a gift from the gods
Why is there a market for worthless penny stocks?
Cullen,
you are terribly wrong in putting the pieces together, especially as to why japan isn’t yet bankrupt and as to why they will never go bankrupt. first of all, japan has a hard working and highly educated population that has had created a tremendous wealth with the help of merchantilist policies… that has been squandered over the past 20 years.
however, you do not reveal the whole picture: thier banks hold primarily JPY denominated assets, tons of gov’t debt, the pension system, insurance companies are as well awash in gov’t debt. the net wealth of the nation is not much in result of all this, they will avoid a technical default due to the fact that they will extend and pretend, but only through money printing they can prop one sector or another. the people know all this crystal clear and THIS IS WHY they do not consume, they know they have absolutely nothing aside besides debt to themselves including for the bridges to nowhere that seem to have gone… nowhere.
Cullen,
i may be a few percentage points off, but i think the figure of domestically owned gov’t debt is above 90%, this money is gone, it is debt to themselves, they have phony retirement and savings accounts, assets are supported still way above the level of the purchasing power of the average citizen, the insurance companies are most certainly bankrupt with assets primarily in the form of gov’t bonds, tons of annuities and this disaster. none of them will go belly up, but this does not address the fact: no company, neither the government have sound finances and any money to rebuild, and do not forget that they are importing pretty much all natural resources which require hard currency and NOT JPY. they either will most likely be selling tons UST and other assets, that supports temporarily a further spike in the JPY, but this ultimately is rebuilding, it does not create extra productive capacity to service the additional debt.
You obviously don’t understand how the monetary system works. Japan holds 90% of its own debt because it does not have a trade deficit. Government debt dollar for dollar equals non-government savings in Yen (for Japan) – accounting identity. Since Japan does not have a trade deficit there is very little foreign savings in Yen.
Likewise the US has a huge trade deficit and foreigns have huge holdings of US treasuries. That’s just how the accounting works!
Spot on, Adam
People just cannot wrap their heads around debt. They think of money as of commodity while they should concentrate on real resources. A country like Japan – which, as baychev himself noted, has “a hard working and highly educated population that has had created a tremendous wealth with the help of merchantilist policies” can go bankrupt!? If so, then there is something very wrong with the whole concept of bankruptcy! What does it matter how much debt Japan owes to its own citizens or to foreigners? This can always be settled by changing numbers on a spreadsheet at the Central Bank. What cannot be settled is real resources and these Japan has aplenty.
since i ‘obviously dont understand’ and presumably you ‘obviously understand’ how monetary policy works, how so you basically said the same thing: they owe the money to themselves, therefore they are neither poor, nor rich.
and since you (presumably) understand accounting, would you be kind to explain to me how an insurance company with gov’t bond holdings equal to 60-70% of total assets would be able to pay out claims right now to such catastrophic events and how it would be able to pay out annuities to retirees that are increasingly growing in numbers without a massive intervention of the printing press? my simple brain cannot see from where else but asset sales and increased premiums the money could come from in a free market economy. are you suggesting nationalization or perpetual gov’t loans for hundreds of billions of USD at 0%?
baychev, what does the insurance company example have to do with anything? They’ll have to sell the bonds to pay out the claims? So? The fact that after such a disaster the insurance companies won’t be able to pay out all the claims could happen in any system. So, yes, probably a massive government intervention will be needed. And they’d have to “print” a lot of money just because so much wealth has been destroyed! To replace it you’d need a lot of labor and real resources and to pay for that you’d need a lot of new financial assets.
Would you mind going through http://pragcap.com/resources/understanding-modern-monetary-system and then seeing if you’d ask the same question again?
@Peter D
insurance companies will have to sell the bonds, and you are saying ‘so?’ this is a few trillion that no one has the money to buy without selling something else prior to that. you really do not know what secondary market is. probably the LEH travails have long been forgotten by you as well, becoming a bigger net seller than the treasury is a trivial matter to you. who would be the buyer? only BoJ has cash. and you are saying they would need resources. probably with your shallow memory you do not remember that barring the u.s. and china, japan is the biggest importer of industrial commodities, and are a very resource poor country. you think they will be able to push the ‘apreciating’ yen to foreigners that have always been paid in usd all the while they are printing trillions of it? your understanding of economics is very arcane.
@Adam,
again: japan has no ‘fiscal’ constraint to print as a sovereign, neither has zimbabwe, but the market brings in the fiscal restraint. as we see, only the u.s. can enjoy frivolous fiscal behaviour because it has pledged to be a net exporter of currency to the world, japan has no such privilege and does not use its own currency in international trade (20% share i believe) and no one would accept it either. the phenomenon that the yen appreciates temporarily is much alike to the appreciation of the doller after the lehman disaster: capital needs to return home to provide cushion against bankrupcy, and it has to happen really fast. look at the details rather than the ‘accounting entities’ while assuming a closed and self sufficient economy which is a wrong premise to begin with.
So, the Yen will have to depreciate? Is that the concern? So there will be a one time adjustment. The country just experienced a huge catastrophe – how that not going to be painful? But it is not like Japan will be unable to produce stuff, like Zimbabwe was with its land reforms. And you’re exposing your bias using phrases like “frivolous fiscal behaviour” – what is “frivolous” about rebuilding your country?
the concern for me is the title and some premises that simply contradict with reality: real incomes are shrinking in japan, aggregate debt is growing, disasters destroy productive assets and real wealth, the gov’t is hell bent to support the debt at its high levels at all costs. such keynesian policies take away the incentives from people to function as economically interested units and to engage in commerce. the whole situation is a desperate attempt to hide insolvency by spreading the pain as far as possible.
i doubt they will face classic default, but what do you call perpetually extended debt that is serviced by more debt that carries 1% interest for 10 year maturity? it is just cash eqivalent, debt monetization, a classic example of a failed state.
Your logic is flawed. “this is a few trillion that no one has the money to buy without selling something else prior to that”
While there maybe temporary declines in asset values from selling, that money is going somewhere. The money is not disappearing. Those insurance claims will be used for rebuilding which means it will be income for someone else which means there will be savings flowing back into assets. There is no place else for the money to go!
No nation can have frivolous spending behavior, but it can spend as much as it wants assuming their are resources available in its currency.
Adam,
your logic is flawed: it is based on the _wrong_ premise that japan has a closed, self sufficient economy. japan does _not_. the money that will be paid out in claims will have to be exported to buy the resources needed to rebuild, but japan needs hard currency to buy resources and that currency has to either be earned in advance or assets abroad have to be liquidated. these 15 minute 5% pops in the yen do not help at all, a japanese company cannot run profitable export oriented business at these yen levels(salaries have to come way down to restore competitiveness) in order to compete with a korean or a chinese exporter. hence the deflation and the prospect for much more financial pain. they have to print their way out of this mess and that hits hard old people, japan as well has the highest crime rate of people over 65(!!!).
Adam,
are you an academic? you seem to be well above the average joe in understanding economics at high level, but you have no real life ecperience to conclude that when you are rebuilding in a contemporary leveraged economy, you are left with the debt on your previous assets that you have to repay first. secondly, only the profit component of the final price can be used to buy assets, the fixed and variable costs just cover what was already going on as economic activity before. and lastly, you seem to be subscribed to the idea that every country has all its resources available are waiting to be extracted and there is no need to produce something else in demand first, get the loan from the producer of that thing and then rebuild and be able to repay as well.
any estimates of the total damages? i read on the big picture $35bn of insured losses and $150-200bn estimated damages but the author (james bianco, not the one from bianco research) discredited himself with claims that represents 4% of the market cap(!!!) of hannover re ($55bn) and other claims that do not pass basic math test.
No I am not an academic. I actually work for a bank, but I do have a graduate background in economics – but I was also wise enough to re-educate myself following the neo-classical disaster that caused the 2008/09 mess.
You really should spend some time trying to understand MMT because its how the monetary system works, regardless of what other so-called economists tell you.
The Japanese government cal AFFORD the rebuilding of its economy as the monopoly issuer of the currency. Can it do this without zero risks – no – it always faces real resource restrictions. As you have noted it is natural resources constrained. However that has not prevented it from becoming the 3rd largest economy in the world. Japan is a highly developed highly industrial nation, it will only need to import raw materials to complete its rebuilding. It also runs a trade surplus with the world. In the worst case scenario it will have to run a trade deficit, but so what?! If it runs a trade deficit it does run the risk of exporting more Yen than the market can support, but that would only drive down the value of the Yen and make its exporting businesses more competitive. In the near term there are some businesses or whole industries that may be at risk because they can not produce or may not be able to produce profitably because of market disruptions, but it is well within the financial capabilities of the government to underwrite these businesses – and justifiable considering nobody caused the earthquake – unlike bailing out banks who did cause their own problems.
The Japanese government only faces 1 constraint – inflation. It can come from too mush domestic demand it creates in rebuilding OR it could come from a falling Yen (import inflation) because of its needs to import additional quantities of foreign natural resources – ideally they’ll just buy American with all their US Dollar reserves it would have zero impact on foreign exchange rate and would put Americans back to work.
Before I get myself into trouble or need to re-explain this… Inflation constraints are the same as being real resourced constrained.
It is quite possible that some insurance companies do not have enough financial assets on hand to cover their losses – they are users of the currency and are fiscally constrained. Japan or any nation soverign in its currency has no fiscal constraints to its spending. If the Japanese government decided to bail out its insurers that would be a political decision within its power to create net new financial assets.
They are buying tons of USD to counter the rising Yen.
no one is buying tons of USD, it is falling against all currencies bar the yen, because buying cannot keep up with the issuance, debt mostly. you are talking here about repatriation of liquid assets that is going on in a dysfunctional market.
The problem come from the fact that we are in a system where something perceived as irresponsible(and often is or can be) can not be corrected with out creating a recession. Our common sense tells us that Government in peace time should have balance budgets but unfortunately the present system can not permit this as it simply does not work this way.
Its like asking bank robbers to be responsible and at the same time asking him to distribute the needed fiat currency to fuel the economy. We can not expect that they will not take there cut, but if we ask them to stop this distribution and balance there books where do you think the credits to offset the “so call” debits will come from ?
Perhaps the confusion and also the problems comes not from fiat money it self but from the channels we use to issue or crate it.
I’ve thought about this a lot. Does it matter? As long as there are goods and services that people want to buy in USD and the US govt can enforce the use of USD’s there is no reason to be concerned. In fact, once we understand how the system actually works I think we’d learn to rely less on the banks and more on efficient spending. In other words, Main St would become the focus of the govt’s efforts. If this actually occurred I think we’d see a period of prosperity in the USA. And happy people don’t revolt. That’s essentially what we experienced from 1945-1995. 50 years of regulation, strong growth and an amazing surge in innovation and prosperity. Then the banks took over….That’s the problem. Not govt spending. And the banking problem starts with the Fed…..
100% agree — now to get a mass of support behind these concepts. I guess one good thing coming out of the financial crisis is more people are now involved and getting educated in the “system”. We are going on three years from the height of the crisis and the dialog is still active. Good news considering the short term news cycles and 5 sec sound bites of politics.
The mass revolution needs to result in Ending the FED, Ending lobby and special interest money elite political influence. Continue to vote out the incumbents if the will of the people is not supported, including the “king of change” Obama.
Right. Unfortunately, the message hasn’t quite gotten across. So what happens? Maybe we elect a bunch of politicians in 2012 that think we’re bankrupt. They cut the budget and the banking crisis re-emerges. We suffer another crisis in the 2013-2015 range? Only then do people wake up and say, “time for real change we can believe in”…..
it is a weird form of slavery: first create a world ‘reserve’ currency, then exploit the merchantilist intentions of few countries to create a trap where they have to work for you and provide you with vendor financing just to keep themselves busy and avert domestic unrest. domestically, to the unemployed masses you pass ‘benefits’ that are just enough to feed and put some clothes on but not excessive and you create a huge mass of people that are dependent and unambitious to move a notch up, since they will have to work. seems a very perverse reality but it will short circuit at the vendor financing side.
“Our common sense tells us that Government in peace time should have balance budgets…”
Unfortunately this is what people believe but what they fail to understand is that the government is an intregal part of the overall economy and forcing such a scenario onto the government may actually do themselves far more harm then they would actually desire.
The US Governments Net Spending (defitic or surplus) MUST EQUAL the Net Sum of the Non-Government Sectors Savings (Domestic Savings Plus Foreign Savings – note foreign savings is the inverse of the trade deficit).
So if we choose to make the government balance its budget (deficit = 0) then by accounting identity (meaning it must be so) Domestic Savings Plus Foreign Savings must be zero also.
Add in the fact that we have a $500 Billion trade deficit ($300 Billion of which is imported oil) that means acking Uncle Sam to balance his budget means the rest of us would have to go into debt to the tune of $500B a year!
The reality is that Uncle Sam is not going to be able to balance his budget no matter how hard he tries. What would likely occur is a massive recession/depression resulting in a massive deficit that wont go away and a lot more unemployed people. Just look at Ireland; austerity there has not made the deficit any smaller. You can not escape the accounting identity. Unless Uncle Sam can force the non-government sector to not net save it can not balance its budget – fact.
“Our common sense tells us that Government in peace time should have balance budgets…”
Adam. I agree with you what I am saying is that this is the way it is not the way our brain is tuned. We the individuals in the economy do not function this way so it is understandable for most us to assume that if 2-2=(0) it should be the same for government but as Cullen keeps reminding is viewers. Reality for the private sector is replace by alchemy for the Government.
I was just trying to expand on your comment. Hope I didn’t imply that you were wrong.
The carry trade bombs…
Next up is various carry-trade and other interest-rate-sensitive strategies blowing up. The carry-trades bombs will blow away many hedge funds to smithereens and forced to close their positions like “nuclear” chain reactions.
An increasingly chaotic monetary and fiscal situation spills over into the derivatives arena, creating a number of financial accidents.
It may unravel rather quickly folks…
Japan is the 2nd largest of holder of the Treasuries (#1 is China) per Barron’s, and expected to sell the Treasuries and repatriate it which involve conversion of selling USD and buying YEN.
This selling of the Treasuries puts additional strain on US interest rate as QE II’s $600 bil binge of buying the Treasuries are to end on 6/30/11.
From this week’s Barron’s The Trader:
“It doesn’t help that Japan, the world’s second-largest foreign buyer of U.S. debt, might now sell a portion of its $1 trillion stash of U.S. bills to help fund reconstruction after its worst earthquake on record. And without more buying by the Fed, treasury yields will likely rise in the second half”.
Welcome to the world of higher rates…
While I would never rule out dumb moves by any government when it comes to monetary operations (since so few get it) I doubt Japan would repatriate all that much of their holdings. They are already upset over the increasing value of the YEN and repatriation by the government would add more to that problem. And secondly if they thought it was a good use of money they’d have done that to so call fund their deficit over the past 20 years – but they didn’t because it would not be in their trade interest.
That said, it might be wise to sell treasuries to buy American resources to use in reconstruction. That would be good for everyone involved.
Remember that if Japan needs to sell Treasuries, it means it wants to buy something denominated in USD – would provide a stimulus to the US.
How much of a stimulus and what effect on rates is dependent on how much spending Japan will need. But also a trillion dollars actually used to be worth something, so some percentage of that may have less of an effect than what commentators talking their book forecast.
I think the main issue is that since Japan has a (hopefully) short term shutdown in exports, they will not have excess dollars to purchase Treasuries, so there has to be some global financial reshuffling.
the japanese gov’t will not repatriate dollars into yen, they will print it when they need it, but they will spend the dollars and thus the euro and commodity related currencies will benefit and spiked against the dollar at the same time… effectively, due to this disaster in japan, the Fed will have to monetize some of the debt. and treasury yields went down to bring further confusion in
Cullen or Scott – on this original piece from SA – there is a debate going back and forth about Iceland and whether it matters that their debt was in foreign currency or their own. Does it matter? Charlie Price says no because if they printed money to pay their debts to foreigners, those foreigners would still have to convert krona to their own currency, thus creating a massive selling of the krona leading to collapse anyways. Input?
“…those foreigners would still have to convert krona to their own currency, thus creating a massive selling of the krona leading to collapse anyways”
This might occur with our without the government covering the debts. If you sold massive amounts of any currency all at once you would expect to see the currency slide. The source of the money is irrelevant.
It absolutely matters.
With foreign currency denominated debt, you can be forced to default and/or govt interest rates can skyrocket. Not so with domestic currency denominated debt. And, yes, the exchange rate may fall if nobody wants to hold the currency, but that just means the rest of the world wants to run a larger trade deficit with you. Also, govt interest rates are a policy variable. The problem here is taking the argument to the extreme, which isn’t overly sensible–too much domestically denominated debt creates inflation just as too much foreign denominated debt, so it’s just about which is less bad, and it’s clearly less bad to be domestically denominated.
A key issue is to have the debt denominated domestically AND have flexible exchange rates. Very few, if any, have had the sort of problem referred to when that is true (not that it couldn’t happen, of course), aside from a self-imposed default. If you don’t have one, not good. don’t have both, really not good.
Japan is not bankrupt, and BOJ can issue a lot of Yen from thin air, just like our Fed. I agree with that. Notice that Yen actually going up big, and I think that will benefit the Japanese people, but hurt their export businesses. The government is in theory BY the people, For the people. In reality, they are by the business, for the business. There is internal conflict of interest between business and people. when Yen goes up, foreign investments in Yen will go up, which will also help Japanses economy. Just like US dollar. when we have a high US dollar, foreign investment goes up, and when dollar falls, the foreign investment is down. to me economically this is a wash. is this not?
I think you are over thinking it. Foreign investment is going to mirror the nations trade deficit/surplus as part of accounting reality. Since the relative strenth or weakness will impact your ability to export or import it will impact the flows of foreign investment per the accounting of those flows of funds.
Look at emerging Bonds yesterday and you know why the yen is up.
Adam wrote:
The US Government’s net spending (deficit or surplus) must equal the net sum of the non government’s sector’s savings (domestic savings plus foreign savings).
So if we choose to have the government balance its budget, domestic savings plus foreign savings must be zero also.
That seems to make sense, for savings should equal spending.
But, how does that equation work in a system in which liabilities can be created out of thin air, with no corresponding assets (other than goodwill, the full faith and credit of the U.S. Government).
Is this what Peter D calls real resources?
Don Levit
Money is just a financial asset who’s job it is to facilitate the exchange of goods and services. So yet it is a real resource and as with any resource too much of it makes its exchangable value decline.
The fact that it appears out of no where shouldn’t be an issue. Think of a nation that only used gold coins. Is the government digs up new gold and makes them into new gold coins should that concern anyone? Only if the mint up more gold coins than are needed.
Under the gold standard that’s how the government added NEW net financial assets to the system. They printed up, out of no where, new bills and bought gold bullion.
It doesn’t matter the source of the net new financial assets if you generate too much of it you’ll get inflation. Likewise if you generate too little you’ll end up with deflation.
Don, what I call “real resources” is what actually underpins economic growth and for which money is only an imperfect proxy. It is the labor force and its skills, the natural resources and such.
Right. Again…important to understand WHEN money is created. It’s not randomly created on a certain day of the week it is created to purchase resources ie when your elected congressman votes to spend.
Bloomberg this morning: Japan keeps their Yen artificially strong to help with the cost of imported oil/energy.
Adam:
I guess if savings equals spending, then the $14 trillion of debt would equal $14 trillion of savings.
And, the Treasury probably knows pretty accurately who the savers are, and how much they are owed.
I am curious what MMT would say about rolling over of debt?
Is there ever a point where this becomes unwise?
Don Levit
MMT would say that it is not in the private sectors best interest to do anything but forever to rollover the debt. Why revoke the peoples savings!?!?
Where you would run into trouble, and this is where Zimbabwe ran into trouble partially, is if your spending is not supporting the productivity of the nation. If you allow your nations productive capabilities to decline then you reduce the nations capacity to support the amount of currency in circulation and that is when you run into inflation problems.
As long as the government is delivering needed services and investing in public goods then its spending (and or debt) will be supported by the output of the nation.
Before I get myself in trouble… One of Zimbabwe’s problems is that they spent years if not decades allowing the productive capacity of the nation to decline. Add in some economically ill advised land reforms and you end up with a nation that needs to spend a lot of money to feed itself but a dramatically smaller economy to support that spending – hyperinflation ensued.
I wish it were that simple. It is not that government debt directly represents net financial assets. The value of government debt equals net financial assets. The form of those assets could be securities, cash, bonds, other financial assets. Government debt is best thought of as an accounting entry.
If there were no public (government) debt, all assets would be secured by private (bank) money, which has an offsetting liability (to the bank) – which essentially means all net assets would be ultimately owned by banks. A true libertarian would want an effective level of government debt in order to support personal freedom. The larger the economy, the largest the public debt level.
As TPC and others have correctly explained that deficit spending is offsetting the private sector deleveraging and resulting in the piling up of “savings” on the private sector side of the balance sheet. As long as the private sector hoarding continues or is static everything is in balance. The challenge begins when these assets flow back into the economy (dis-savings) and the velocity of that flow. Relative to the glacial movements of the Fed/Gov., dis-saving “may” happen swiftly, pushing up against resource limitations much faster than people expect, potentially leading to an inflationary/currency deflation environment. Japan is the trial balloon given their demographics and theoretically stretched fiscal balance sheet. The eventual transition may just be a gradual, orderly shift or it may be a snowball rolling down a steep hill, no one really knows. The JCB/Gov. has the tools to control it, but will they use them properly and on a timely basis? Am I getting this right or am I missing something here?
Essentially correct. I would not use quotes around savings, though. If the private sector wants to net save, then the government must run a deficit (assuming no trade surplus) to maintain economic activity, regardless of whether you are in expansion or deleveraging mode. In deleveraging mode, the contraction is private money is so steep that you would expect government debt levels to “soar”.
The challenge you describe is the kind of problem the Fed wants to have – it means that economic activity is restarting and that dead assets are coming back to life in terms of demand. I think the probability of this is low, considering that we have not cleaned up the financial sector, which the financial sector knows, so there is still high risk involved with investment (don’t know who to trust). I believe we are headed for a start-stop kind of economic activity.